Chapter 24, Problem 1MCQ

To determine

Find the correct option, the option that indicates the amount of advertising expense allocated to appliances department, based on sales value.

Answer to Problem 1MCQ

The correct answer is option (b).

Explanation of Solution

Joint cost: The total cost incurred to produce or manufacture or process, more than two products at the same time, is referred to as joint cost.

Allocation of joint costs:

• Physical basis of allocation: In this method, joint costs are allocated when the number of units, or pounds, or square feet, cubic feet, gallons used by individual products, can be compared and measured with the total number of units, or pounds, or square feet, cubic feet, gallons used by the total products.
• Value basis of allocation: In this method, the joint costs are allocated to the value of sales revenue generated by number of units of individual products, can be compared and measured to the sales revenue generated by total number of units.

Compute the amount of advertising cost allocated to appliances department, based on sales value.

Department	Sales	Percentage of Total Sales	×	Advertising Cost	=	Allocated Cost
Housewares	$356,250	$\begin{array}{r}\$356,250÷\$1,425,000\\ =25\%\end{array}$	×	$150,000	=	$37,500
Appliances	641,250	$\begin{array}{r}\$641,250÷\$1,425,000\\ =45\%\end{array}$	×	150,000	=	67,500
Clothing	427,500	$\begin{array}{r}\$427,500÷\$1,425,000\\ =30\%\end{array}$	×	150,000	=	45,000
Total	$1,425,000	100%				$150,000

Table (1)

Hence, $67,500 is allocated to appliances department. Hence, option (b) is correct.

Conclusion

Therefore, options (a), (c), (d), and (e) are incorrect, and option (b) is correct answer.